OSMO LST Support Re-evaluation: September 2024

Proposal Discussion
1

This discussion aims to update current OSMO LST supporting liquidity to be closer to the three main targets as initially laid out here:

  • Minimal OSMO staked using Protocol Liquidity
  • Diversity of OSMO LSTs
  • Resilient Pegs for OSMO LSTs

These proposals:

  • Move towards minimal OSMO LST holding by the community pool by shifting the 50/50 stOSMO stableswap to a Concentrated liquidity position which will expire as redemption rate increases.
  • Further optimizes stOSMO and qOSMO liquidity by deploying more liquidity to the Locust vaults.
  • Dissolves stkOSMO liquidity due to the discontinuing of support by pStake
  • Improves the backing of bOSMO and ampOSMO beyond the existing White Whale liquidity by adding additional liquidity to Locust vaults based on Concentrated Liquidity pools.

Current Status of OSMO LST liquidity

  • 9M OSMO in a stOSMO Stableswap pool, remaining from Proposal 641

    • 50/50 stOSMO/OSMO

  • 8.3M OSMO in a static Concentrated Liquidity position from Proposal 769

    • This position is from 1.2075 - 1.27, as current market rate is 1.265 this is mostly OSMO and will be out of position in around 2 weeks.

  • 200k OSMO assigned to stOSMO as a trial Locust vault deployment in Proposal 798

  • 931k OSMO assigned to qOSMO in a static Concentrated Liquidity position in Proposal 770

    • This position is from 1.13 - 1.19 and is single sided as OSMO
    • This position is currently held in the Liquidity subDAO address pending the enabling of ICA on Quicksilver, which blocked the intended double-sided position.

  • 1.07M OSMO assigned to stkOSMO in a static Concentrated Liquidity position in Proposal 771

  • 1.2M OSMO assigned to ampOSMO in White Whale pools

    • Composed of 50/50 ampOSMO/OSMO
    • Custodied by a multisig as passed in Proposal 821

  • 1.2M OSMO in White Whale pools

    • Composed of 50/50 boneOSMO/OSMO
    • Custodied by a multisig as passed in Proposal 821

Total OSMO in program: 21.7m

Chart 1: Composition of LST Backing Liquidity

Chart 2: Peg support provided to each LST

Performance

Since the deployment of liquidity to the Concentrated Liquidity pool in April, stOSMO volatility has been far reduced, showing the improvement in liquidity efficiency that these concentrated positions have over Stableswap positions.

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Other deployments of liquidity have been less successful, with qOSMO only being able to be provided single-sided, stkOSMO seeing little adoption, and ampOSMO and bOSMO gaining niche usage from the White Whale pools.

The trial Locust deployment has transitioned from a 60/40 split of stOSMO/OSMO to a 5/95 split, reducing the community pool staked OSMO while increasing the liquidity depth provided by the stableswap liquidity by around 50 times due to the re-positioning ability of the vaults.

These proposals aim to further optimize the stOSMO holding of the community pool, reduce the staked OSMO held by the community pool to as low is functional to allow purchase between the redemption rate and market price, and increase support for alternative Liquid Staked tokens by deployment of liquidity from these optimizations.

Rather than propose these as conditional proposals relying on the stOSMO redeployment, they will be proposed in sequence with minimal overlapping.

Proposals:

Proposal 1 - stOSMO liquidity reevaluation

Current stOSMO liquidity

  • 9M OSMO in a stOSMO Stableswap pool, remaining from Proposal 641

    • 50/50 stOSMO/OSMO

  • 8.3M OSMO in a static Concentrated Liquidity position from Proposal 769

    • This position is from 1.2075 - 1.27, as the current market rate is 1.27 this is mostly OSMO and recently went out of position briefly.

  • 200k OSMO assigned to stOSMO as a trial Locust vault deployment in Proposal 798

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Proposed actions

Transfer all stOSMO stableswap liquidity, stOSMO concentrated liquidity, and liquid stOSMO to the Osmosis Liquidity subDAO to perform the following actions

  • Remove all protocol liquidity from the stableswap pool.
    • This should be performed incrementally if the existing concentrated liquidity position is out of range during this action.
  • Create a new stOSMO position of 1.24 - 1.3 in the 0.05% pool using the newly available liquidity.
    • This position will initially be 50% stOSMO and 50% OSMO.
    • This position will last approximately three months before it becomes entirely OSMO through the redemption rate increase, closing the Osmosis community pool’s static holdings of Staked OSMO via Stride.
  • Remove the 1.2075 - 1.27 position from the concentrated liquidity pool
  • Transfer 700k OSMO and any excess stOSMO from fee collection into the Locust vault for stOSMO/OSMO as previously used in Proposal 798.
  • Transfer the remaining OSMO, the vault representing tokens, and the static position ownership to the community pool.

stOSMO Liquidity after proposal

  • OSMO assigned to stOSMO support lowered from 17.5 million to 10 million.
    • The stOSMO peg performed very well during recent volatility. The initial 20 million OSMO liquidity was assigned when Stableswap pools were the only option for deployment.
  • Liquidity depth remains similar due to increased overall concentration.
    • Static positions perform approximately 10x better than stableswap pools
    • Locust vaults have trended towards holding a narrower position in a mostly single sided position and perform approximately 30x better than stableswap pools.
  • Osmosis community pool holdings of stOSMO will be removed through arbitrage over three months.
    • This reduces staked OSMO held by the community pool to a minimal amount depending on the liquidity usage. If stOSMO loses peg, more is staked until arbitraged back. If the market rate is close to the redemption rate, then stakers are undiluted.

Proposal 2 - Close stkOSMO position

This proposal would close the static stkOSMO position established in Proposal 771 and return the OSMO to the community pool.

This is due to the developers of stkOSMO changing their focus to Bitcoin liquid staking, as announced here.

This proposal would transfer the stkOSMO position to the Osmosis Liquidity subDAO, which would facilitate removing the liquidity and return it to the Osmosis Community Pool.

Any stkOSMO recovered by this process will be redeemed for OSMO via unstaking and also returned to the Osmosis community pool.

Proposal 3 - Transfer qOSMO backing liquidity to Locust

This proposal would transfer the qOSMO backing OSMO position established in Proposal 770 to a Locust vault to provide deep backing liquidity for reliable collateral usage.

The liquidity provided as a static position in Pool 1590 is currently out of range and does not allow the peg of qOSMO to be maintained.

This proposal approves the transfer of this position to a Locust position before returning to the Osmosis community pool. This restores this liquidity to functionality while improving the efficiency of the backing liquidity by around three times.

About Locust

Locust is a market making and position management tool specifically designed for Concentrated Liquidity (CL) pools.

In CL pools liquidity is often provided at inefficient ranges. This is largely due to the difficulty of active management coupled to a desire to ensure that a position remains in range as much as possible.

Locust LST strategies track the redemption rate of the LST and create positions based on the current market rate, the target price of the asset and the expected price at which redemption arbitrage reached equilibrium with staking. This ensures that this liquidity is always used to buy at a pre-defined discount to the target price and sell back at a discount

Proposed Deployment

  • Initial strategy of target vault:
    • Spread: 1%
    • Discount 0.25%

The buy side, consisting of OSMO is from market price to market price - spread.
The sell side, consisting of the LST, is from redemption rate to optimal rate - discount, where optimal rate is based on the profitability of redemption arbitrage vs staking.

LocustVault

For the qOSMO/OSMO vault the fee schedule would be:

  • Withdrawal Fee: 0%
  • Performance Fee: 15%

Proposal 4 - Provide backing liquidity to bOSMO via Locust

This proposal would allocate 1,000,000 OSMO from the community pool to support the peg of bOSMO.

Current liquidity for bOSMO is provided on a White Whale xyk pool and is stored in a custodial multisig according to Proposal 821. This liquidity continues to provide a base level of liquidity for both bOSMO and ampOSMO.

This additional liquidity would be provided to the concentrated liquidity pool, 1922, via a Locust vault.

Based on current performance of Locust Vaults vs xyk pools, this liquidity should be around 50x more efficient than the existing deployment, enabling the wider use of ampOSMO through deeper backing liquidity, decreasing volatility when holders decide to utilize the benefit of a Liquid Staking Token to change their holdings or a disposal is required by use cases such as lending protocols.

This proposal would transfer 1m OSMO equivalent of bOSMO and OSMO from the community pool to the Osmosis Liquidity subDAO, which will deposit these to the bOSMO Locust vault and return the representative tokens to the community pool.

About bOSMO

bOSMO is a Liquid Staked Token for Osmosis minted by the Gravedigger protocol on Backbone Labs.

Delegation weighting is an even split between whitelisted validators.

bOSMO is the market token for the Mad Scientist NFTs on Necropolis and is also distributed to Mad Scientist holders on Osmosis.

About Locust

Locust is a market making and position management tool specifically designed for Concentrated Liquidity (CL) pools.

In CL pools liquidity is often provided at inefficient ranges. This is largely due to the difficulty of active management coupled to a desire to ensure that a position remains in range as much as possible.

Locust LST strategies track the redemption rate of the LST and create positions based on the current market rate, the target price of the asset and the expected price at which redemption arbitrage reached equilibrium with staking. This ensures that this liquidity is always used to buy at a pre-defined discount to the target price and sell back at a discount

Proposed Deployment

  • Initial strategy of target vault:
    • Spread: 1%
    • Discount 0.25%

The buy side, consisting of OSMO is from market price to market price - spread.
The sell side, consisting of the LST, is from redemption rate to optimal rate - discount, where optimal rate is based on the profitability of redemption arbitrage vs staking.

LocustVault

For the bOSMO/OSMO vault the fee schedule would be:

  • Withdrawal Fee: 0%
  • Performance Fee: 15%

Proposal 5 - Provide backing liquidity to ampOSMO via Locust

This proposal would allocate 1,000,000 OSMO from the community pool to support the peg of ampOSMO.

Current liquidity for ampOSMO is provided on a White Whale xyk pool and is stored in a custodial multisig according to Proposal 821. This liquidity continues to provide a base level of liquidity for both bOSMO and ampOSMO.

This additional liquidity would be provided to the concentrated liquidity pool, 1923, via a Locust vault.

Based on current performance of Locust Vaults vs xyk pools, this liquidity should be around 50x more efficient than the existing deployment, enabling the wider use of ampOSMO through deeper backing liquidity, decreasing volatility when holders decide to utilize the benefit of a Liquid Staking Token to change their holdings or a disposal is required by use cases such as lending protocols…

This proposal would transfer 1m OSMO equivalent of ampOSMO and OSMO from the community pool to the Osmosis Liquidity subDAO, which will deposit these to the ampOSMO Locust vault and return the representative tokens to the community pool.

About ampOSMO

ampOSMO is a Liquid Staked Token for Osmosis minted by Eris protocol.

Delegation weighting is determined by participants staking ampOSMO in turn to indicate their preferences from a whitelist of validators.

Eris Protocol also maintains a LST arbitrage vault for both ampOSMO and bOSMO to maintain their peg close to the redemption rate.

About Locust

Locust is a market making and position management tool specifically designed for Concentrated Liquidity (CL) pools.

In CL pools liquidity is often provided at inefficient ranges. This is largely due to the difficulty of active management coupled to a desire to ensure that a position remains in range as much as possible.

Locust LST strategies track the redemption rate of the LST and create positions based on the current market rate, the target price of the asset and the expected price at which redemption arbitrage reached equilibrium with staking. This ensures that this liquidity is always used to buy at a pre-defined discount to the target price and sell back at a discount

Proposed Deployment

  • Initial strategy of target vault:
    • Spread: 1%
    • Discount 0.25%

The buy side, consisting of OSMO is from market price to market price - spread.
The sell side, consisting of the LST, is from redemption rate to optimal rate - discount, where optimal rate is based on the profitability of redemption arbitrage vs staking.

LocustVault

For the ampOSMO/OSMO vault the fee schedule would be:

  • Withdrawal Fee: 0%
  • Performance Fee: 15%

Further proposals

While not expressly drafted at this time, I want to raise the potential for adding support for Pryzm’s OSMO Yield pool token as an LST equivalent for debate.
Pryzm liquid stakes OSMO as cOSMO and splits the principal and yield into pOSMO and yOSMO.
The OSMO Yield pool token contains cOSMO and pOSMO, allowing users to switch between the different types of fragmented tokens.
To exit this entirely, Pryzm has a pool called “OSMO Boost” comprising 90% of the Yield pool token and 10% of OSMO.
The Osmosis equivalent would be a ratio that targets the opposite weighting; therefore, the Osmosis community pool would hold a mix of cOSMO, pOSMO variants, and OSMO rather than just cOSMO/OSMO.

While this model is more complicated than a typical LST, it follows the same principle and is submitted for consideration for this program.

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That was quite a piece to read through.

I agree with most of the points, except the ampOSMO and bOSMO points. I want to address the point of decentralisation on that one, since enlarging the split for these 2 assets also is delegated to a very low number of validators if I’m correct. I would like to see that changed before actually enlarging the share of that LST. I am aware that in the end a lot of different versions of LST-OSMO is good to have, but we as a protocol can set requirements which must be met before we as a project dedicate funds to support that specific LST. And a crucial one for me is that it should not contribute to centralisation, but at least spread out delegations (also to limit the risk of LST holders).

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Thank you, @JohnnyWyles, for your well-crafted post. Once again, we’re impressed by the depth of thought and care you put into articulating your ideas. It’s a pleasure to engage with such thorough work that directly benefits the Osmosis chain.

Regarding the proposals, we focused on the following:

  • Shift stOSMO to Concentrated Liquidity Pools: This migration from stableswap aims to increase liquidity efficiency.
  • Close stkOSMO Liquidity: Suggests ending stkOSMO liquidity due to its limited benefit.
  • Boost Support for qOSMO, bOSMO, and ampOSMO: Enhance liquidity through Locust vaults for better depth and peg stability.

We extend our support for these initiatives but believe separate on-chain votes would allow the community to assess them individually. While these proposals align with a cohesive strategy, giving them independent approval could foster more transparent community engagement.

Thanks again for your valuable contributions,
Govmos
pro-delegators-sign

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I also agree that there is a decentralization issue with ampOSMO and bOSMO.
ampOSMO is a bribery based system on a whitelist - where the whitelist has quite an array of validators.
The “Eris Wars” page can be found here, and I’m surprised that there isn’t more involvement. Currently 1 OSMO can get about 40 OSMO delegated to you so validator action by those already on the list could very easily skew the stake.

bOSMO is a standard whitelist. I believe this is meant to be moving to a DAO control at some point, but until then validators should be able to request addition directly.

The important thing to note here is that this is not the Osmosis Community Pool buying/minting ampOSMO and bOSMO, but adding just OSMO to the buy side of the peg.
It may result in increased ampOSMO/bOSMO holding during the support of the peg depending on stability, and may result in increased adoption overall from the asset liquidity improving, but it doesn’t directly mint more of those assets and so does not increase the stake of those whitelisted validators.

Thank you for the compliment and feedback. I have structured this as five proposals so they go onchain for voting separately.

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Good point to clarify. So in essence only the position of the CP with respect to ampOSMO/bOSMO will be enlarged if the peg fails, right?

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Proposal is failed:

Iets fout in de metadata?

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It’ll get reloaded tomorrow - the source I used for setting the spend amounts said the GAMM amount for the community pool was higher than was actually in the community pool.

Going to double check on a testnet then load again with the right value.

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First two proposals - stOSMO and stkOSMO are now onchain.
The qOSMO, bOSMO and ampOSMO will be loaded tomorrow to allow time for comment as I just edited the proposal text for each due to some changes to the vault functionality.

  • Initial strategy of target vault:
    • Spread: 1%
    • Discount 0.25%

The buy side, consisting of OSMO is from market price to market price - spread.
The sell side, consisting of the LST, is from redemption rate to optimal rate - discount, where optimal rate is based on the profitability of redemption arbitrage vs staking.

LocustVault

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Hey thankyou for all the details, we (GATA HUB) have for now voted No on all three props, because we think 15% performance fee is on the high side. Can you shed more light on this?

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The performance fee is typical for vault structures or managed liquidity both in the Cosmos and outside.
Quasar charges 20%, Apollo charges 15%.

Since this is a performance fee, it is based on the yield generated by the positions rather than the underlying.
i.e., this is not a 150,000 OSMO fee per pool; it is likely to be more like 15% of between 0 and 10% APR, or 0-15,000 OSMO, paid by LPs rather than the community pool. This assumed that this APR would never outperform Staking due to LP competition.

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Thank you for the timely reply, I have the idea of the performance fee. When we talk about LSTs and their pools shouldn’t we consider the market Leader Stride which charges 10% fee.?

Community pool is enabling the projects to have sustainable liquidity, for greater ecosystem benefits mainly the beneficiary is the project itself. I think performance fee should be on the lower side, probably 10%. It is not about the 1000 USD they will make from this but about the precedent we are setting.

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I am particularly interested in adding support for PRYZM in the “Further Proposals” section. (note the typo “Prysm”)

I have successfully utilized strategies to acquire more Osmo through PRYZM’s tools without purchasing additional tokens. I believe PRYZM has a very promising future.

However, I am unclear about your proposed support involving a 90% Osmo token and 10% Osmo Yield Pool Token (which includes cOsmo and various pOsmo’s). Could you please elaborate on this idea and its benefits?

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Both would be applicable here and is the reasoning behind the goal of:

  • Minimal OSMO staked using Protocol Liquidity

When we hold an LST with protocols like Stride, we pay a 10% fee for staking inflation, which directly costs the protocol from the Staked emissions. This is most prominent in the dYdX LST deployment, which effectively said that they are willing to pay Stride directly for a secure and diverse validator set, however, with a reliance on Stride security. Since this comes directly from the protocol expenses this is one to minimize.

When we hold underlying OSMO, any fees generated by the pool come from trading only - which is then used as the vault performance fee. For these LST positions, we will pay both the LST provider’s fee, which would depend on the LST/Underlying ratio for the percentage cost of the overall deployment, and the performance fee based on trading volumes through the pool. Since this comes from swap fees, optimization is less of a concern, but competing vaults would ideally emerge to reduce the fees.

One interesting side-effect of these LST positions is that, as they compound their earnings from swap fees and facilitate trades that generate protocol revenue in OSMO, they act as a circulating supply reduction mechanism for users utilizing LSTs. We can potentially offset the security inflation to stakers through this mechanism. Not quite a secondary burn mechanism, but effectively a tax on LST usage that both reduces circulating OSMO as well as increases the Community Pool holding.

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Sorry for the typo, corrected!

This is the inverse ratio of the Pryzm liquidity as they have different aims.
The “OSMO Boost” with 90% Osmo Yield and 10% OSMO aims to allow holders to generate the yield from the OSMO Boost, while also enabling some liquidity to exist to swap into OSMO from this.

Osmosis wouldn’t want the yield here, since most of it would be from inflation that is being paid to stakers to secure the network. What is more important for Osmosis is to enable the ability to switch from the OSMO Yield token to OSMO and back.

Having a pool that is primarily OSMO enables the OSMO Yield → OSMO route of trade with depth, which would complement the Pryzm OSMO boost that mostly enables the OSMO → OSMO Yield route of trade to have depth.

I’ll confess that you are probably more informed about the strategies enabled by Pryzm here. I am aware that there are some interesting techniques that can be employed by the yield fragmentation and looping, but haven’t fully looked into them. The important thing for me is enabling others to carry out this experimentation which is why I was raising liquidity support as an option.

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Thank you again for the detailed explanation, i agree to most of the points but, The idea that LSTs help reduce circulating supply through swap fees may not sufficiently justify the performance fees being charged. If a significant portion of the profits generated from trading is going toward fees, the net benefit to stakers and the protocol may be minimal. If the fees diminish the overall yield for users, this could deter participation in the LSTs altogether.

at the end i would only request that the community see at the end of the term what benefits each party received with this proposal. Parties being community pool, protocol, LST providers, vault providers.

2 Likes